Legalization would reduce state and federal deficits by eliminating expenditure on prohibition enforcement — arrests, prosecutions, and incarceration — and by allowing governments to collect tax revenue on legalized sales.
This potential fiscal windfall is of particular interest because California, which is facing a budget shortfall of $19.9 billion for fiscal 2011, will vote Nov. 2 on a ballot initiative that would legalize marijuana under California law. Advocates of the measure have suggested the state could raise billions in annual tax revenue, in addition to saving criminal-justice expenditure or reallocating this expenditure to more important priorities. Should the California measure pass and generate the forecasted budgetary savings, other states would likely follow suit.
In our recent study, just released by the Cato Institute, we estimate the impact of legalization on federal, state, and local budgets. The report concludes that drug legalization would reduce government expenditure about $41.3 billion annually. Roughly $25.7 billion of this savings would accrue to state and local governments, and roughly $15.6 billion to the federal government. About $8.7 billion of the savings would result from legalization of marijuana, $20 billion from legalization of cocaine and heroin, and $12.6 billion from legalization of all other drugs.
Legalization would also generate tax revenue of roughly $46.7 billion annually if drugs were taxed at rates comparable to those on alcohol and tobacco. About $8.7 billion of this revenue would result from legalization of marijuana, $32.6 billion from legalization of cocaine and heroin, and $5.5 billion from legalization of all other drugs.